Global Labor Rates: China is no longer a low-cost country

The race to manufacture and source products in China started in the late 1990s and continued for two decades.

As China ascended to the World Trade Association in 2001, accessibility of this low-cost labor and low-cost operations country looked very attractive to global manufacturers, and many companies set up factories in China or began sourcing Chinese parts and products.

Over this period, Chinese manufacturing became more sophisticated, the quality of products improved dramatically, and Americans and Western Europeans were welcomed with open arms. China was the low-cost and best solution for manufacturing.

However, as China moved up the maturity curve, Chinese workers became more skilled, and manufacturing processes and machinery became more advanced. The Chinese economy strengthened, and nearly 150 million people were lifted out of poverty and into the Chinese middle class through employment in factories mostly in the eastern coastal areas of China. This was the Chinese Industrial Revolution on steroids, and as industrialization gained momentum, labor rates started to rise for Chinese workers.

Recognizing that labor rates in China have been on the rise for several years, the Reshoring Institute studied and compared global labor rates around the world. What follows are the high-level results of our newly published research study comparing labor rates in 13 different countries.

The countries, including the United States, were selected for comparison, based on where Reshoring Institute clients were relocating their manufacturing from or to. European companies such as those located in France and Germany, along with the United States, have been considering moving out of China to other low-cost countries.

Other companies are interested in bringing manufacturing home. While there are many more countries that could be considered, the research focused on this sampling as the most relevant for comparison.
 

China no longer low-cost

The Reshoring Institute team investigated how manufacturing wages have risen in China and what this means for companies going forward. Wages and salaries of production workers, machine operators, manufacturing supervisors, and managers were compared. The research concluded that China can no longer be considered a low-cost country, as its labor rates have significantly increased.

The lowest-cost countries in the study are now India, Mexico, and Vietnam. And while there are even lower-cost areas of the world, such as Myanmar, Bangladesh and Africa, the Reshoring Institute focused its study on where most manufacturers are moving to now, after leaving China.

How much labor is included in your product?

The production cost impact of rising wages depends on how much labor is required to manufacture a product.

If a product has high labor content as a percentage of its total cost, such as the production of athletic shoes or apparel, then choosing the lowest-cost labor country is very important to keep costs low. In other industries such as textiles and automotive, where automation greatly reduces the need for labor, more country locations may be considered.

Another important factor is the availability of labor in a country or region. As an example, take the production of cell phones. While the cost of labor content may be quite low compared with the retail price of the phone, the availability of thousands of workers to staff a production factory may be an issue.

In many world locations there simply aren’t enough workers to fill the jobs at mega-assembly operations. In the United States and Western European countries, worker shortages to fill existing positions have become a major problem, while in countries such as India, China, and Mexico labor is relatively plentiful.

Productivity rates are also important to compare. If a worker in China is paid $300 per month and one in Vietnam is paid $200 per month, it seems reasonable to consider moving to Vietnam until you compare productivity rates. Chinese workers with more experience and often better skills may work faster and with a low error rate as compared with Vietnamese workers. When all of these comparisons are taken into consideration, the decision to move may not be so attractive.

Average salaries in selected countries for production managers and supervisors